How to correct distribution from 401(k) plan to participant whose empl

[Guest Ed Walker]

A participant terminated in January 2000. We provided her with benefit elections forms after the January 30, 2000 valuation was completed.

She was paid by the Trustees in May 2000. Lo and behold, when we come to the September valuation we learn that she had been rehired in April. No one told us or told the trustee not to pay.

This is a 401(k) plan. She is 49 years old. She took the money in cash (less her $900 loan) and of course it's been spent.

What should happen now?

[QDROphile]

If someone wants to get hypertechnical, and argument can be made for requiring the employer to restore the balance. Nice double dip for the participant.

While working on a VCR filing, I asked the IRS reviewer (who was very experienced and knowledgeable) how he saw a similar situation where the particpant slipped back into a large organization on rehire just before the distribution had been made. HR/payroll did not advise the plan administrator in time to stop the check. This issue was not part of the VCR filing. His personal view was that a reasonable failure to catch a rehire while a legitimate distribution was in process would not be seen as an error. Under his view, the facts and circumstances would be critical.

So there is an argument that nothing is wrong. But what do you do besides say there is no problem? There is no obvious APRSC solution except restore, which is so outrageous that it would be suspect. If there is no problem, you can't go to VCR because you can't ask VCR to confirm there is no problem. You might go to VCR, say there is a problem, and propose that the participant be given the opportunity to return the funds, but that the plan would not try to recover them if the participant failed. I would like to test that one. So you be the subject of the experiment and report back to us on the outcome.